Good morning. My name is Lattania, and I will be your conference operator today. I would like to welcome everyone to KB Home 2015 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference is being recorded and a live webcast is available on KB Home's website at kbhome.com. Following the company's opening remarks, we will open the lines for questions. KB Home's discussion today may include forward-looking statements that reflect management's current views and expectations of the market conditions, future events, and the company's business performance. These statements are not guarantees of future results and the company does not undertake any obligation to update them. Due to a number of factors outside of its control, including those identified in its SEC filings, the company's actual results could be materially different from those expressed and/or implied by the forward-looking statements. A reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in the company's earnings release issued earlier today, and/or on the Investor Relations page of the company's website. At this time, I would now turn the call over to Jeff Mezger, President and CEO of KB Home. Mr. Mezger, you may begin. Jeffrey T. Mezger - President, Chief Executive Officer & Director: Thank you, Lattania. Thank you, everyone, for joining us today for a review of our second quarter results. With me are Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Corporate Treasurer. This morning, I will start with a brief overview of our results for the quarter along with an update on our strategic initiatives. Then, Jeff Kaminski will provide additional detail on our financial…

Thank you. We will now conduct a question-and-answer session. We ask that all callers limit themselves to one question and one follow-up. Our first question comes from Megan McGrath with MKM Partners. Please proceed with your question.

Good morning. So thanks for all the guidance and still working through it a little bit, but a couple of questions here. On the community count, you've talked in the past about having some issues opening communities and seeing some delays there. So you were able to get a fair amount opened in the quarter. Did some of those delays and issues subside in the quarter? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Megan, I've shared on past calls that that's been one of my biggest frustrations; as we've been reloading for growth, it's taking longer than we projected to get communities opened. And I think lot of the delays from last year and early this year, finally came through and culminated in the big jump in openings. I think we're now – we're continuing to fight through delays with contractor base service city (25:12) processing and a little bit of weather right now. I don't know if it has gotten a lot better, but we've plateaued at a higher level now, because a lot of what was in the queue was pushed through. So there's still some headwinds in getting them open, but I think we're a little further ahead of the game than we were in the past.

Okay. Thanks. And then just wanted to get a little bit more color on your ASP guidance and your confidence there. I look at your backlog ASP and it's about $340,000, (25.56) but your guidance at least for the 4Q looks like it's calling for a significantly higher number in the fourth quarter. Is that just an expected mix, as you talked about, towards some of these newer communities? What's behind that confidence especially for 4Q? Jeff J. Kaminski - Chief Financial Officer & Executive Vice President: Right, yes. There are several things I think that are behind it. One, I think traditionally if you track it that way you'll notice that most cases our backlog trails a little bit from our future quarter ASPs. Part of it is a lot of the backlog hasn't been fully through the studio process at this point. So while some of the backlog reflects studio orders or additions, it all doesn't reflect it. Part of it is certainly mix and part of it is still some sales to go in the next couple of months that will deliver out in the fourth quarter, particularly some of our higher priced ASP product in California.

Thank you. Our next question comes from Susan Maklari with UBS. Please proceed with your question.

Good morning. Jeffrey T. Mezger - President, Chief Executive Officer & Director: Good morning, Susan.

My first question is that you noted in your comments that you expect to continue to generate cash and you actually could have some more land sales than had originally been expected. How do you think about the uses of that cash, especially investing in the business relative to perhaps other shareholder return sort of oriented things? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Right now, Susan, we're reinvesting to fuel growth. We're just now growing into the scale that we're capable of and it helps to carry the current debt load and our overhead structure and it's the best way to improve our returns.

Okay. And then my next question is, you also noted – you made a comment about household formation and how that seems to be improving more recently over the last few quarters. How do you think that as that comes together, it breaks out between the rental versus buy decision? Are you seeing a lot more first-time buyers coming into your communities? Jeffrey T. Mezger - President, Chief Executive Officer & Director: I think the household formation will favor both rental and ownership on both sides. It's typically a first-time buyer that's created when a millennial moves out of the home, is fully employed, gets married, has a child, all the normal lifecycle things that have been delayed for a decade. And as we shared in our prepared remarks, our first-time buyer percentage did move up a little bit in the quarter. We were up to 56% – couldn't tell you if that's a sustained trend or a coincidence of mix. But we saw an increase in three of the four regions during the quarter – a couple of points a region in first-time buyers. So it's an encouraging sign and as I've shared, it's what's been missing to get a sustained housing recovery. We haven't had the first-time buyer demand and this household formation that's developing, that was very encouraging.

Thank you. Our next question comes from Michael Rehaut with JPMorgan Chase. Please proceed with your question.

Hi, thanks. Good morning, everyone. Just to go back to the first-time buyer for a moment, if you could give us what that percent was in the first quarter and also a year ago. And I'm just trying to get a sense on a bigger picture, if you think that's being driven by any easing of credit conditions or underwriting standards that are out there or if it's more just this broader macroeconomic momentum that's in the backdrop in terms of employment and the economy continuing to go in the right way? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Yeah. Mike, I'll speak to the macro trends and then Jeff can give you the numbers. If you think about it, over a 40-year period, the nation averaged 1.2 million household formations. From the period of 2008 to 2014, we averaged 500,000, well below normal. So people that don't have a job, they're staying with their parents longer – everything we've talked about over the past few years. With the job growth that's occurring and the ageing of the millennials, they're getting to a point in their life where they're getting a job and moving on with their life. So if you go from annualizing the 500,000 to 2 million, it creates demand, whether it's rental or for sale, there's a lot more people that are out there needing a roof over their household. So I think it's a combination of the pent-up demographics and an economy that's creating jobs. Jeff J. Kaminski - Chief Financial Officer & Executive Vice President: In relation to your question on the percentages, Mike, as Jeff mentioned, 56% was the percentage for the most recent quarter, last quarter was at 50%. It had been trending sort of in the low to mid 50%s for the last six quarters or seven quarters. One year ago, it was 54%.

Great. And then just a couple clarification questions on the guidance, Jeff. You mentioned you raised 4Q gross margin guidance a little bit from prior, if you could just remind us what that prior guidance was for 4Q? And also, when you talked about community count, up low double-digits in 4Q, just wanted to know if that was against – is that – when you say up low double-digits, is that against the year ago average or the year ago end of quarter number? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Yes. Yeah. Good question, Mike. Starting with community count, it's the average against the fourth quarter average in the prior year, so fourth quarter 2014. On the guidance on the margins, if you kind of do the math and where we started from the first quarter and we kind of gave guidance sequentially as improvements in basis points, last quarter. And if you kind of go through it, it gave us a range of 17.7% to 18.2% for the fourth quarter. And like I said, we're slightly increasing that, now saying that we believe, we'll be in excess of 18%. So we're kind of taking the 17% off the table for the fourth quarter.

Thank you. Our next question comes from Stephen Kim with Barclays. Please proceed with your question.

Yeah, thanks a lot, also appreciate all the granular guidance, it's helpful. I wanted to first ask, I think Jeff Mezger, you mentioned in your opening remarks that it was your intention and you're going to continue your strategy of increasing your profitability first, before focusing on increasing absorptions, sales per community, I was curious if you could share with us, if you have a certain threshold in mind for overall profitability metrics that would allow you to sort of cross over into the next stage of focusing on absorptions or if there is some other way in which you're thinking about that internally that you could share? Thanks. Jeffrey T. Mezger - President, Chief Executive Officer & Director: Sure. Sure, Stephen, what I – I didn't touch on profitability, I touched on gross profits that we're not going to move our sales pace up until our gross margins are achieved. I'd say that because you can also improve your profitability through inventory turns and just running a better business and that's part of our improvement in profitability. As we analyze our communities, most of them have an optimal return in the three months to four months range. Depended on how much the initial investment is, it's larger in some states than others, but on average, it's three months or four months. So we'll toggle back and forth. If something selling above the four months' range, we'll push price, and so, you move this one, and over here, this community may be a two a month, so you do things to get the sales pace up, because you're focused on the returns. Over time, as we continue to toggle and work on everything we've shared, we continue to have a goal of a gross margin in excess of 20% and SG&A ratio around 10%, maybe a little lower than 10% now with the way we're headed and we'll be working between the two to get there, but in the meantime, you won't see our sales pace lift until we get our margins north of 20%.

Okay. That's very clear and very helpful. Thanks very much for that. I guess the next question relates to your average price mix. So obviously, there's a lot of things that go into the average price metrics that we can calculate on our ends, but as you think about the distribution of your product that you're offering to various buyer types, over the last few years, KB has been engaged in the process of moving that upwards. And you started your project in San Fran for example. Can you give us a sense for generally speaking, where you think – what inning you think we are in terms of making that migration, the deliberate migration, higher? Do you feel for example that by the time you get to the earlier part of next year that you will have essentially accomplished your goal or do you feel that this is still a multi-year process that you're going to be engaged in from here? Jeffrey T. Mezger - President, Chief Executive Officer & Director: I think it's a continuum, Stephen. We like to use the term that we move with demand and we've shared that we can have a product series at a certain width in a city that ranges from 1,200 square feet to 4,200 square feet and if the demand is evident in higher footages and price points, that's the product we'll put to market. If the demand in that area moves to more first time, we'll go to the lower footage and maybe change the spec level and attack the lower price point out of the same product series. So my hunch is, as these markets continue to normalize, we'll probably settle pretty close to the range we're in right now, first-time buyer range around 50% to 60%, our first or second move-up another 30% and then move-downs that are 10%. Also, at the same time, I think if you go back to my comment, we're seeing price still around on the resale side, but it's moderating, and to me, it's part of a healthy recovery, inventory keeps clearing, and as prices normalize, I would expect year-over-year, you'll see our pricing track with the more normalized inflation rate and we'll follow demand in the different cities and that's what will drive our mix and price.

Thank you. Our next question comes from Alan Ratner with Zelman & Associates. Please proceed with your question. Alan Ratner - Zelman & Associates: Hey guys, and congrats on a solid quarter. The first question on Texas, Jeff you mentioned weather headwinds there. You did raise the low end of the revenue guidance for the full year. I was curious just what you're hearing from your guys in this field about production delays and how you are thinking about that for your third quarter and fourth quarter revenue guidance, talking about the cycle times on Texas deliveries, any changes there and kind of how you're building in some conservatism? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Well, we certainly took some hits with the weather in May. It's pretty incredible what's been occurring in an area that was suffering from a drought. We lost some deliveries in the quarter, no question about that due to the weather and the way we're looking at it, you didn't just lose deliveries in the quarter, your framing slowed, your Sheetrock slowed, your finish slowed. So you have this roll, where I think just kind of extended out a quarter across the WIP. So it's not like we lost deliveries and we see a big uptick in Q3, because we're going to go right back and get them, it moved out the whole production machine. Having said that, we took all that into consideration in the guidance that we have given here. While our WIP was impacted by the weather, it did impact our land development as well. So we're trying to find ways to compress time now in areas where we couldn't grade or couldn't pave over the last 60 days. Alan Ratner - Zelman & Associates: Okay. Jeffrey T.…

Thank you. Our next question comes from Joel Locker with FBN Securities. Please proceed with your question.

Hi guys. Just curious about your community count in the Southwest region, what it was at the end of the quarter and versus a year ago, at the end of the second quarter? Jeff J. Kaminski - Chief Financial Officer & Executive Vice President: Well, the community count in Southwest was up quite significantly. On an average basis for the quarter, if you look at third quarter over the third quarter, we're up about 117% in community count between the operations there. So we more than doubled and we're pretty pleased with the performance both in the ability to get new communities opening, in a way they're performing and particularly, also saw an absorption increase in the region. So we're quite pleased with how that's gone there.

Thanks. And then just a follow-up on SG&A. Do you have a breakdown of the $78.5 million in the second quarter between commissions, marketing and corporate? Jeff J. Kaminski - Chief Financial Officer & Executive Vice President: I mean we do, but it's a little detailed. I don't have it right in front of me. I will make one comment on the SG&A for the quarter. In relation to our forecast, where we thought we come in, we came in pretty much spot on. We were a little bit light on the percentage – or a little bit heavy on the percentage by about 10 basis points just due to some of the deliveries that we lost. But we did anticipate a sequential decline, which we had. We did not anticipate catching the prior year number, which we did not. And the main driver of it is – as we talked about in the prepared remarks was that we knew with an expanded community count and setting up the second half of the year that we were going to have to absorb some additional investment in infrastructure and overhead cost in the second quarter, especially, those that are community related in order to drive strong second half revenue growth. So for us, it was pretty much on expectation for performance in that area.

Thank you. Our next question comes from Robert Wetenhall with RBC Capital Markets. Please proceed with your question.

This is actually Collin filling in for Bob. Thank you for taking my questions. So during the first quarter earnings call, you guided toward a sequential increase of 50 basis points in your homebuilding gross margin. What drove this beat versus your expectations? Jeff J. Kaminski - Chief Financial Officer & Executive Vice President: Right, yeah, there were several factors in there. The predominant – I guess, when we were forecasting, the 50 basis points predominantly came from leverage; increased revenues on some of our fixed costs are included in margin. What we also saw during the quarter was some pretty strong pricing trends. So on our spec inventory, I believe we had slightly better margins than anticipated or anything that we sold and delivered in the same quarter. We had a real nice quarter of cost containment, on the cost side and in fact, probably one of the best six-month periods we've had in quite some time, from that point of view. And we had, obviously, a little bit of favorable mix in the quarter. So it was a 40 basis point beat or so and is close to our expectations and we're pleased that it was a little bit above.

Great. And then a question on conversion ratios, given your guidance for the third quarter, I'm kind of forecasting that you've seen a decline year-over-year. When do you expect this to tick up towards more normalized levels and what would you consider in the more normalized levels? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Yeah, Collin, actually, it ticked up last year, because we were covering some inventory. As you look at our business model, if we're imbalance, a lot of your backlog hasn't started yet. In a Built to Order business, you wait more. Your backlog too sold and not started. And if you think about our sequencing and the rhythm, it's a six-month cycle from contract close. You'll have about a third of your backlog that's either not started or just started and will close two quarters out, not next quarter. So over the years, when we're in balance, our backlog conversion is around 50% maybe 55%. When you're growing, you're typically growing the unstarted backlog ahead of the started backlog. So it could be we're below 50%, I don't know, but it would be 1% or 2%. And as we continue to grow our backlog in our WIP, (43:30) you'll see us hang around 50% to 55%, but it'll be a very predictable 50% to 55%.

Thank you. Our next question comes from Mike Dahl with Credit Suisse. Please proceed with your question. Mike, your line is live.

Hi, Jeff and Jeff, this is Anthony (43:50) on for Mike. Thanks for taking my question and congrats on a solid quarter. My first question has to do with, you talked about the goals to drive higher revenues per community and the way to do that was increased option use, so I was just wondering if you could talk about the pricing – when you think about increasing revenues, is it going to come from higher option pricing or are buyers increasing the amount of options as to their purposing or how you think about crafting this strategy going forward to drive higher revenues per community? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Anthony (44:28), if you look at our previous calls and the transcripts, what we've shared is we're lifting our revenue by community with the types of products we're putting out there far more than pushing option revenue. And I'd say that relative to communities we're opening maybe in a higher price area or a higher income area and you'll model a larger array of footage, and you'll get higher pricing on the same lot because you put a larger home on it, and that's where we'll move around with demand. On the studio side, we use it first and foremost to sell homes, and along the way there's always incremental revenue opportunities. I don't know if you have the numbers, Jeff, on what our studio has been doing, but it roughly tracks about 10% of the base revenue. So as we push our base revenue, that buyer typically will spend about 10% in the studio. The other parts of our Built to Order where we continue to mind pricing is in lot premiums, elevation premiums. You can evaluate over time what plan sells better than another because it's all built to order and you can move your pricing on the plan that's outselling the others to keep everything in balance. So it's not just a studio, it's across the whole spectrum of the selling process.

Great. Thanks. And then my second question is obviously you guys know two of your competitors recently merged. So I was just trying to get your take on how further industry consolidation is going to – how you think about that impacting your strategy in terms of land acquisition or how you go forward with your relationships with either construction or material suppliers. So just your overall take on that? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Yeah. Well, M&A has been a part of our industry for a long time. Certainly, I'm not going to comment on the transaction that was announced. I'll leave that one to the experts, but in our world, we've always seen our best returns come from organic growth and that's what we're working on right now and we're doing pretty well.

Thank you. Our next question comes from Nishu Sood with Deutsche Bank. Please proceed with your question.

Thanks. Wanted to ask about the cadence of demand that you've seen so far this year. I mean you mentioned that your markets have been strong and you've seen potentially some broadening out; you mentioned across all four of your regions demand was strong. So just wanted to get your sense of that. Has demand overall and as you dig down into the regions, has it been accelerating anywhere or has it been mainly that this – simply this broadening out across the regions. And as we look to the second half of the year, is there anything that gives you pause or reason for encouragement, because it seems like a lot of investors look at this space and they say housing demand just can't sustain into the second half of the year in a lot of years. So I just want to hear your thoughts overall on what you've seen so far and what you expect? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Nishu, good questions. Specific to our business, there is no question that our demand has broadened out, where some regions that weren't as larger contributor to our orders are stepping up quite a bit. So there is a broadening, but within the markets that we're in, we're seeing strength across the markets. There is not – all of them are doing better at their own pace of improvement, but there is none that I can think of where I'd say that's a tough market today. It's a pretty broad-based strengthening going on and I think a lot of it's demographics. This household formation you can't ignore the demand that gets created when those many people are moving from the roost.

Got it. Got it. And second question, I think you've been pretty clear that you want to use or capture this demand in pricing and margins versus trying to drive your absorption, so we appreciate the strategic clarity. Where do we stand in terms of pricing? And the way I was thinking about this was if the current pace or the pricing power that you're seeing out there, is it enough that it would get you eventually to your 20% rough target that you're talking about or would we need more pricing power to emerge to balance out your pricing against the pace of cost increases you're seeing? Jeffrey T. Mezger - President, Chief Executive Officer & Director: I would say that we have the potential to get there in the current market conditions in that whenever markets have priced, the land sellers are smarter than we are. So land prices go up or your cost goes up, you need to lift your margins through your execution, your product mix, the submarkets that you're investing in. And we think we've got a nice pipeline set up right now of new openings in the right submarkets where we make get more price, we don't count on that. If we do, we'll certainly take it. But we're trying to raise our margins without the benefit of price.

Thank you. Our next question comes from Alex Barrón with Housing Research Center. Please proceed with your question. Alex Barrón - Housing Research Center LLC: Thanks, guys, and good job. I wanted to ask about the entry level demand that you're seeing as well as the mothballed communities. Are those mothballed communities, what type of consumer, I guess, are you trying to target? Is it entry level or move-up and how is this increase in the entry level demand shifting your strategy going forward? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Couple of comments, Alex. Every community that we're activating is a different position in that submarket. So we've activated some that were more affordable play. And we've activated some that are first move-up play or even into a second move-up play. No different than new investments at the same time. As long as we feel, we can get the right returns with the acquisition or the activation that – I've shared on the call that we're pretty nimble about moving with demand and within our current holdings or future holdings, we can move up or down in footage and spec level and price to where the demand is. On the resale said, I think this household formation is going to help unlock what I call the food chain, where if there's more strength in the first-time buyer demand, people can sell their homes and move up to their next home now, which they may not have been able to do in the past. So I think on the macro side, this household formation is really going to help; and within our company, we'll continue to navigate and target where the strength is in that location. Alex Barrón - Housing Research Center LLC: Okay. And as far…

Thank you. Our next question comes from Jack Micenko with Susquehanna International Group. Please proceed with your question.

Hi, good morning. Most of my questions have been answered, but I was looking at the option-owned mix and your option mix is down pretty fairly significantly. And just curious, obviously you've got a lot of development dollars in the land spend too. I mean is it a strategic shift away from option, is the margin mostly in more raw land purchase here at this point or have seller preferences changed, just curious as to the mix owned versus option strategy here? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Ideally we'd option every lot we could, Jack. In the A locations that are land constrained, pretty difficult to get an option. We have done some and continued to, but Jeff can you give the color on how the numbers have moved, but I wouldn't read too much into that, but obviously we'll continue to turn and develop our owned, but you will see us tie up lots in the future on options where we can. Jeff J. Kaminski - Chief Financial Officer & Executive Vice President: Yeah. In speaking on the numbers, I think Jeff said it right. I wouldn't read too much into it. It does vary quite a bit. You do have a tendency. From time to time, you go out and lock up some option lots, sometimes you let those options go and you never actually close on the lots. Other times they move into owned as time progresses. So it's not, I'd say, a purposeful shifting that you see there; and like Jeff said in good locations with good returns and good margins, we love option lots because they're more capital friendly; however, right now we're seeing, I guess, a majority of development deals coming across.

Okay. Great and then I think you mentioned the first time a little bit balancing margin and pace and getting that margin – getting close to those margin targets on one hand and then if you see more demand on the first time, should we think, look we're going to get to 20% (54:45) before we start really moving down to that true entry level where the margins are a bit less, but the pace is higher or are you going to stick with, look our buyer is built to order and it may be a higher income first-timer as it's been, who are going to stay with that, just thinking how that looks in the context of sort of your longer term strategy given the mix is a little bit different with that buyer profile? Jeffrey T. Mezger - President, Chief Executive Officer & Director: It's an interesting question in that, I was in Texas a month ago in Austin and we actually had a first-time buyer community I visit that's selling extremely well, margins above the company average at a high absorption rate, because we have a large lot position, so you let it run above the four. And in the same town, we had opened up a first and second move-up product that was selling above local averages, probably three a month, at a much higher price, actually a little lower percentage, but higher dollars. And actually as we're doing the math, driving around the returns, we're much higher on the first-time community than they were on the move-up community because you had above-average margin in a very strong pace. I say that because people think your margins are going to be lower on first-time buyer product and they are if it's a play that's a volume play, but over time a lot of our communities that are the more well-healed first-time buyer, I'll say margins are above our company average just because the price is lower doesn't mean that the percentage margin has to be lower. And your run rate's typically a little higher.

Thank you. Our last question will be from Susan Berliner with JPMorgan. Please proceed with your question.

Hi, thank you. Just one question to follow up. I guess with regards to your cash position after the bond repayment, I apologize if I didn't hear this, I guess I was wondering with regards to cash flow over the next year or so and I guess your appetite for potentially raising new bonds? Jeffrey T. Mezger - President, Chief Executive Officer & Director: Right. I think the most important thing to kind of focus on right now with regards to cash is where the second half's forecasted to come in. We'll have revenues in excess of $1.8 billion, ranging up to about $2 billion in the second half of the year, which will generate significant cash flow not only from improved profitability in the second half, but also from the return of the investment that's already in the land as we get that back. So we're pretty comfortable right now with where things are heading. We've purposefully put more cash to work. We do plan and intend to run the company with a much lower cash balance, particularly with our revolver that we have standing behind it, giving us additional liquidity. So we're pretty comfortable with that. The prior discussions we've had all still hold. We're still continuing to target the 40% to 50% leverage ratio as we move forward. And again, very comfortable with the liquidity and the cash position at this point in time.

Great. Thank you.

Thank you. At this time, I would like to turn the call back over to Mr. Jeff Mezger for closing comments. Please proceed. Jeffrey T. Mezger - President, Chief Executive Officer & Director: Right. Thank you, Lattania. And thank you, everyone, for joining us on the call today. Look forward to speaking with you again in the very near future. Have a great weekend and Happy Father's Day.